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Commodity Update: Open Interest Analysis for June 20th, 2013

August WTI crude oil lost $3.34 on heavy volume of 812,238 contracts. Volume was the highest since June 7 when 871 598 contracts were traded and crude oil advanced $1.27 while open interest increased by 24,058 contracts. Additionally, the decline on June 20 was the largest of 2013, and the closest one to it occurred on April 3 when WTI declined $2.74 on volume of 675,832 contracts while open interest declined 5,762 contracts. On June 20, total open interest increased only 4,502 contracts, which relative to volume is approximately 75% below average meaning that liquidation was very light on the largest price decline of 2013. The July contract accounted for loss of 13,816 of open interest. In the upcoming Weekend Wrap, we will discuss crude oil in greater detail, especially in relation to the COT report which will be released the afternoon of June 21 As this report is being compiled on June 21, WTI is trading $1.44 lower and has made a new low for the move at $93.12. Crude oil remains on a short and intermediate term buy signal.

Brent crude oil:

Brent crude oil lost $3.97 on heavier than normal volume of 714,749 contracts. Volume was slightly higher than June 11 when 714,570 contracts were traded and Brent lost 94 cents while open interest increased by 805 contracts. On June 20, open interest declined by 16,159 contracts, which relative to volume is approximately 10% less than average. Although Brent will not generate a short-term sell signal on June 21, the odds are high this will occur on Monday, June 24.

Heating oil:

August heating oil lost 10.07 cents on light volume of 121,251 contracts. Volume increased by approximately 19,000 contracts from June 19 when heating oil gained 1.04 cents and open interest declined 1,910 contracts. To put the volume on June 20 in context consider that the average daily volume for heating oil in May 2013 was 129,671 contracts, April 2013 was 138,986 contracts. Year to date, average daily volume for heating oil has been 141,674 contracts. Considering the magnitude of the decline on June 20, it is apparent that market participants have been reducing their trading in the products. On June 20, open interest declined by 1,555 contracts, which relative to volume is approximately 45% less than average. The July contract lost 5,343 of open interest. As this report is being compiled on June 21, heating oil is trading 3.11 cents lower. Although heating oil will not generate a short-term sell signal on June 21, it is likely to occur on June 24.

Gasoline:

August gasoline lost 10.59 cents on volume of 152,550 contracts. Volume increased approximately 42,500 contracts from June 19 when gasoline advanced 1.28 cents and open interest increased by 3,635 contracts. Although volume was larger than normal, it does not compare favorably to the April 2013 average daily volume of 162,669 contracts, but was slightly above the average daily volume for May 2013 of 140,489 and was close to the average daily volume year to date of 151,255 contracts. Like heating oil, the lack of volume on a major decline is indicative of a lack of participation in the gasoline market. On June 20, open interest declined by 2,834 contracts, which relative to volume is approximately 25% less than average. The July contract accounted for loss of 4,568 of open interest. Although gasoline will not generate a short-term sell signal on June 21, it is likely to occur on June 24.

Natural gas:

August natural gas lost 8.6 cents on volume of 330,726 contracts. Volume increased approximately 85,000 contracts from June 19 when natural gas advanced 5.8 cents and open interest declined by 4,066 contracts. On June 20, open interest declined by 5611 contracts, which relative to volume is approximately 35% less than average. The July contract accounted for loss of 18,891 of open interest. The market continues to exhibit short-term bearish action, and based upon trading on June 21, it would appear that August natural gas will test the low of $3.71 on the continuation chart.

Soybeans:

July soybeans lost 25.50 cents on volume of 159,755 contracts. Volume declined by approximately 33,000 contracts from June 19 when soybeans gained 12.50 cents and open interest increased by 2,931 contracts. On June 20, open interest declined by 2,912 contracts, which relative to volume is approximately 25% less than average, meaning that liquidation was light on a fairly hefty decline. The July contract accounted for loss of 10,650 of open interest. For the past 3 days beginning on June 18, the daily highs have been lower and the daily lows have been lower. This pattern has continued into the June 21 trading day. Although price and open interest action have been acting in a bullish congruent pattern, the reality is the move to the high of $15.58 3/4 on June 12 may have been the last tradable high for the current crop year. First notice day is only one week away, and though the July contract may move to new highs after this, speculators will not be able to participate. Currently, the August contract is selling at an approximate discount of 80 cents to July. Additionally, the gravity of the equity market and the disinflation/deflationary tendencies of commodity markets may take its toll on the possibility of a continued rally. There is a great deal concern about the economic environment in China and this is becoming a perennial problem for the markets. Soybeans remain on a short and intermediate term buy signal, but we would avoid the market entirely for now.

Soybean meal:

July soybean meal lost $8.00 on volume of 71,545 contracts. Volume declined approximately 17,000 contracts from June 19 when July soybean meal gained $1.80 and open interest increased by 4,248 contracts. On June 20, open interest declined by 2,724 contracts, which relative to volume is approximately 50% above average, meaning that liquidation was unusually heavy. The July contract accounted for loss of 8,042 contracts. July soybean meal has displayed solid support at $445.00 since June 10, but the market does not have the momentum to move significantly above the June 12 high of $469.90. Although it is likely that we have seen the high in soybeans, soybean meal is somewhat of a different story. Conceivably, we could see a new high in soybean meal during the next 30 days. If soybean meal breaks below $444.00, the next area of support would be the 440.00 area. With global equity markets in a downtrend, soybean meal could experience a pullback that would be greater than normal. Soybean meal remains on a short and intermediate term buy signal, but we recommend a stand aside posture for now.

Corn:

July corn lost 9 cents on volume of 282,830 contracts. Volume shrank dramatically by approximately 163,000 contracts from June 19 when July corn advanced 9 cents and open interest increased only 46 contracts. On June 20, total open interest declined by 8,114 contracts, which relative to volume is average. The July contract accounted for loss of 17,761 of open interest. As this report is being compiled on June 21, corn is trading 8.75 cents lower and has taken out the low of June 20 of 6.67 1/2. Corn has been showing solid relative strength compared to the rest of the grain complex and commodities in general. However, the market is due for a pullback, but based upon the downward trends in commodities and equities, corn is likely to have a difficult time moving significantly beyond the $6.83 1/2 high made on June 19. Corn remains on a short-term buy signal and will not generate an intermediate term buy signal on June 21.

Wheat:

July wheat lost 6.50 cents on heavy volume of 143,573 contracts. Volume declined approximately 26,000 contracts from June 19 when July wheat advanced 19.50 cents and open interest declined 781 contracts. On June 20, open interest declined 2,156 contracts, which relative to volume is approximately 40% below average, meaning that liquidation was light. The July contract lost 14,224 of open interest. Wheat has held up remarkably well in the face of declining equity and commodity markets. From April 10 through June 20, trading in the wheat market on the continuation chart has been bounded by a high of $7.21 1/2 made on April 30 to lows of 6.76 on May 20 and 6.75 on June 13. The the heavy bearish position held by managed money is not driving the market lower. April 10 through June 20 is 51 trading days, and the 50 day moving average of July wheat is $7.0 1 3/8, which is within 1 penny of the closing price of July wheat on June 20. Although wheat has not generated a short-term buy signal, we think this may be on the horizon. Do not short wheat.

Cotton:

December cotton lost 1.24 cents on light volume of 23,709 contracts. Volume increased approximately 2,500 contracts from June 19 when cotton lost 72 points and open interest declined by 2,625 contracts. On June 20, open interest declined by a massive 4,344 contracts, which relative to volume is an extraordinary 500% above average. The July contract lost 3,725 of open interest and December lost 807. On June 13, December cotton generated a short-term buy signal, which confirmed the intermediate term buy signal. Since then, cotton has had a significant pullback, but the correction has exceeded OIA's 3 day protocol. Another concern is that the market has not had the ability to rally, even after declining for four days. The trouble with cotton is that it is dependent upon the Chinese economy and market participants from all areas of finance are questioning the sustainability of higher growth prospects. The extract from the June 19 report (below) expresses our views on cotton. It appears the short-term buy signal generated on June 13 is false. Positions have not been recommended.

From the June 19 report:

"If the buy signal generated on June 13 is not a false signal, June 20 should be the last day of declines. If cotton declines significantly on June 21, it is likely the buy signal would be reversed. Ideally, we want to see today's low hold, and if a new low is made on June 21, it should be only fractionally lower."

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